Wedgewood Partners, a St. Louis, Missouri-based investment management firm, released its Q1 2020 Investor letter – a copy of which is available for download here. Wedgewood Partners returned -16.30% for the first quarter. Meanwhile, the benchmark Russell 1000 Growth Index and the S&P 500 Index lost 14.10% and 19.60%, respectively.
In the said letter, Wedgewood Partners highlighted a few stocks and Fastenal Co (NASDAQ:FAST) is one of them. Fastenal sells industrial and construction supplies in a wholesale and retail fashion. Year-to-date, FAST stock lost 2.3% and on April 29th it had a closing price of $36.74. Its market cap is of $20.8 billion. Here is what Wedgewood Partners said:
“We sold our position in Fastenal during the quarter after owning it for a bit more than three years. We have been pleased with the fundamental performance of the Company during our holding period, and we continue to like Fastenal’s business model and competitive position in an industry that will benefit from the long-term renaissance in American manufacturing. The stock, however – separately from the business fundamentals – has been a bit more of a wild, occasionally head-scratching ride during our holding period.
In terms of fundamentals, we timed our purchase of the stock quite well, as the Company began to recover from the U.S. industrial recession in 2016 and moved from declining revenues and profits to double-digit percentage growth in each for an extended period, as the Company took share in a healthy industrial economy. However, the stock was sluggish for a time as the distribution industry suffered from an “Amazon panic,” with the market suddenly deciding that Amazon was going to take over the industry. We argued at the time that Fastenal, uniquely in the industry, had capabilities – specifically, physical locations, physical inventory, and live humans on the ground near its customers, or even stationed on its customers’ factory floors – which Amazon did not have, and that Fastenal would be fine. This proved to be correct over the past few years and will continue to remain correct, we believe. Fastenal’s stock eventually shook off this Amazon panic and started to perform as its fundamental performance warranted.
We then had a period during 2019 when the U.S. economy, and especially the U.S. industrial complex, slowed, primarily due to a variety of trade- and tariff-related issues that caused investment in heavy industry to pause while decision-makers awaited more clarity. Strangely, while fundamentals were slowing, Fastenal’s stock continued to find favor with investors, eventually leading to us trim the stock as it hit all-time highs while fundamentals were going in the wrong direction.
This continued divergence between sliding business fundamentals and a relatively resilient stock has led us to sell our position outright. The primary problem for us right now is that we still do not believe most investors appreciate how much the American manufacturing/industrial renaissance has been dependent, directly or indirectly, on the fracking-driven oil and gas revolution in the U.S. We think the clear evidence for this was the complete collapse of the entire U.S. industrial complex when oil prices collapsed in the 2014-2016 period, despite an otherwise healthy U.S. economy. This 2014-2016 collapse, incidentally, took Fastenal’s business with it.
With Saudi Arabia currently using the coronavirus pandemic as cover for starting another oil price war – similar to the price war it initiated in 2014 – the price of oil swiftly collapsed to a level even worse than its trough in the last oil crash. While it is impossible to determine how long current prices might last, or whether some semblance of normalcy in financial markets might lead oil prices to recover somewhat, we can predict with certainty that oil demand currently is nothing like it was before the pandemic, and Saudi Arabian supply is rising. This means that American oil and gas production will be lower, for some period of time, through economic choice (i.e., not choosing to pump oil at a money-losing price) and/or through financial stress.
So, as this situation pertains to Fastenal, industrial demand is definitely lower right now, with most of the economy on lockdown, and the oil price definitely will come out the other side of this period lower than it was before, meaning activity in the U.S. industrial complex likewise will be lower after this lockdown period than it was before. When we weighed this clearly worse near and intermediate-term fundamental position against a stock that had held up surprisingly well, both before and after pandemic worries, we decided to sell our position and to deploy the proceeds elsewhere. We want to state clearly that we believe in the long-term American manufacturing and industrial renaissance, and we also believe in Fastenal and its dominant competitive position, so we will continue to monitor the Company.”
In Q4 2019, the number of bullish hedge fund positions on FAST stock increased by about 10% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
